Should responsible investors only consider ‘green leaders’?

Instinctively, we are tempted to think that a responsible investor will categorically refuse to invest in companies that pollute or are too resource-intensive. In fact, we need to take a nuanced approach and seek to identify the ‘good students in the making’ in addition to companies that have long adopted a sustainable business model and practices for the planet.

Investing in existing ‘green leaders’

Investing in ’green leaders’ means choosing to support companies which are explicitly run to facilitate the transition to a low-carbon economy. A few examples include:

  • Tesla*: An American company which develops and manufactures fully electric vehicles, as well as energy generation and storage systems. Tesla has invested heavily in the development of electric vehicles and remains a market leader in terms of innovation. Its production lines have significantly improved and are now running at full speed, with the carmaker working to extend the life of its batteries far beyond that of most other vehicles. All of Tesla’s batteries are recycled at the end of their life.
  • Alfen*: A Dutch company that offers transformation stations, energy storage systems and charging stations for electric vehicles; it also provides solutions focused on automation, the management and maintenance of networks and integrated energy solutions.

Investing in these companies is one way to help manage climate-related risks and aim to generate financial returns in a portfolio. However, limiting exposure to only green leaders could mean missing out on opportunities in companies which are committed to a path of improvement.

Investing in companies with responsible ambitions

Investing in a company with a low environmental, social and governance (ESG) score today should not necessarily be written off. If the company demonstrates solid financial health and a viable ‘brown to green’ transition programme, which is accompanied by proactive management teams who empower themselves to achieve their goals, the subject merits serious consideration. As such, we believe that many investment opportunities can be found among those who are acting for the transition, namely the shift from their current business model to a more sustainable and environmentally friendly model.

In our view, over time, this approach could prove beneficial. We believe a forward-looking approach is crucial in any investment, as understanding which direction a company is heading in is key to unearthing opportunities for future growth. Thus, since AXA IM's first responsible investment mandate in 1998, we have supported many companies in their development as well as in their green transition. Here are some examples of companies changing their business models to actively reduce their carbon footprint:

  • Neste*: The Finnish company was originally an oil refiner. Early on, the management teams - which we had met - understood that this model would not be sustainable over the long term. Neste has since redesigned its business model and transformed its production process to become a world leader in biofuel.
  • Ørsted*: The Danish offshore wind power producer has set an ambitious goal of achieving carbon neutrality by 2025 by switching from fossil fuels to become a renewable energy company. In 2018, Ørsted opened the world's largest offshore wind farm in the UK.
  • Iberdrola*: The Spanish energy group has also gone through a huge transformation over the past 20 years and continues to increase its clean energy portfolio. While its transition is not yet over, Iberdrola can boast of having significantly reduced its CO2 emissions to become one of the European leaders in contributing towards the fight against climate change.

A favourable regulatory environment

Concrete and demanding, the EU’s Sustainable Finance Disclosure Regulation (SFDR) regulations, which were introduced in March 2021, clarify and categorise responsible investment solutions. In this way, we can approach the integration of ESG criteria from two different angles: firstly, a defensive approach implies that the use of regulations will gradually make obsolete the activities that consume the most natural resources; and secondly, the offensive dimension, which refers to companies that provide relevant solutions to ESG issues which will grow in scale.

So, as we have seen, integrating ESG criteria can not only address much of the problems of the modern world, it is also not antagonistic to the prospect of financial returns.

90% of AXA IM's assets under management are classified under Article 8 and Article 9 of the SFDR1

ESG matters are, by their very nature, long-term issues. In keeping with our convictions and our analysis, each year we strengthen our active ownership programme and support companies. This requires in-depth financial analysis through which the will, trajectory and means needed to move to a more sustainable and profitable business model will need to be demonstrated.2

Asset managers who wish to go down this path will have a key role to play and, through their investments, will be able to contribute to the challenges facing people and the planet by promoting the energy transition and progress in society. This is our mission, and this is how we seek to bring value to our portfolios, and to our clients.

Sources:

*All stocks mentioned are for illustrative purposes only and should not be considered as advice or a recommendation for an investment strategy. All company information can be found on their websites and is accurate as at 30 April 2021.

[1] AXA IM, as at 31 December 2020. All percentages exclude non applicable assets (assets that are managed outside the EU and therefore not in scope of the regulation). As at 31 December 2020, assets under management within Equities, Fixed Income and Multi-Asset stand at €587 billion out of which €460 billion are applicable under the SFDR. The product categorization is provided based on the basis of the European Directive (EU) 2019/2088 on the sustainability-related disclosures in the financial services sector (“SFDR Regulation”) and state of knowledge at the time of creation of this document and may evolve.

[2] The ESG data used in the investment process are based on ESG methodologies based in part on data provided by third parties, and in some cases developed in-house. They are subjective and may change over time. Despite several initiatives, the lack of harmonized definitions can make ESG criteria heterogeneous. For example, different investment strategies that use ESG criteria and ESG reporting are difficult to compare with each other. Strategies that incorporate ESG criteria and those that incorporate sustainability criteria may use ESG data that appear similar but need to be distinguished because their calculation methods may differ.